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Financial Instruments –Accounting Disclosures and Policies 2007-08

Financial Instruments –Accounting Disclosures and Policies 2007-08. Roman Haluszczak – Lead Advisor CIPFA FAN Contact: Roman.Haluszczak@ipf.co.uk. Disclosures of Financial Instruments – SORP 2007 GN - Page 722– Onwards – (1).

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Financial Instruments –Accounting Disclosures and Policies 2007-08

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  1. Financial Instruments –Accounting Disclosures and Policies 2007-08 Roman Haluszczak – Lead Advisor CIPFA FAN Contact: Roman.Haluszczak@ipf.co.uk

  2. Disclosures of Financial Instruments – SORP 2007 GN - Page 722– Onwards – (1) • Part 1 sets out the required disclosures of financial instruments. Its purpose is to require authorities to provide information in their financial statements that would enable users to evaluate: 1. The significance of financial instruments for the authority’s financial position and performance 2. The nature and extent of risks arising from financial instruments to which the authority was exposed and how the authority manages those risks. • The extent of disclosure required depends on the extent of the authority’s use of financial instruments and of its exposure to risk. To the extent that required information is presented on the face of the financial statements, it is unnecessary to repeat it in the notes. • Disclosures may include a combination of narrative descriptions and quantified data, as appropriate to the nature of the instruments and their relative significance to the authority.

  3. Disclosures of Financial Instruments – SORP 2007 GN - Page 722– Onwards – (1) • The significance of financial instruments for the authority’s financial position and performance – disclosures in the balance sheet, I + E Account and the notes to the accounts so that users can evaluate the significance of financial instruments for the authority’s financial position and performance • The nature and extent of risks arising from financial instruments to which the authority was exposed and how the authority manages those risks – the requirement is to provide notes to the accounts that explain the authority’s exposure and its policies and make a quantitative assessment of exposure. • Risk Assessment – linked to the authority’s treasury management strategy, treasury practices and the prudential indicators for treasury management. It would be helpful to include a statement that the authority has adopted CIPFA’s Treasury Management in the Public Services: Code of Practice and that it has set treasury management indicators to control key financial instrument risks in accordance with CIPFA’s Prudential Code.

  4. Disclosures – A Definition for Stakeholders • Disclosure – The provision of financial and non-financial information to stakeholders interested in the economic activities of an entity. This information is normally given in an annual report and accounts which would include financial statements and other financial and non-financial information • Disclosures need to be genuine, relevant ,complete accurate and timely • Should not obscure the main performance and risk assessment messages relating to your authority’s final accounts position with too much detail. Conversely they should have adequate detail to be helpful and meaningful to stakeholders • They should assist stakeholders in making better sense of the financial instrument performance and risk position of the authority • Might your particular disclosures pass such a test? – Disclosures will be extensive – Produce a skeleton of disclosures now (AC advice)

  5. Significance of Financial Instruments for Financial Performance

  6. Disclosures of Financial Instruments – SORP 2007 GN - Page 722– Onwards – (2) • Significance of Financial Instruments for financial Position and Performance • Carrying amounts of defined financial assets and liabilities should be disclosed in the notes to the accounts – Para 4.91 Page 723 – As follows (a) loans and receivables (b) available–for-sale financial assets (c) unquoted equity investment at cost (d) financial assets at fair value through profit or loss (if any) (e) financial liabilities at amortised cost (f) financial liabilities at fair value through profit or loss (if any).

  7. Disclosures of Financial Instruments – SORP 2007 GN Para E7 - Page 730– Onwards (1)– Clarity on 2006/07 Comparators ?

  8. Irish Funds Industry Association Disclosures (2007) (1)

  9. Irish Funds Industry Association Disclosures (2007) (2)

  10. SORP 2007 Para 4.79 onwards – Transition to the New SORP 2007 Requirements (1) • Date of transition to the new FRS 25, 26 and 29 requirements is envisaged to be 1st of April 2007 • Change in accounting policy: 2006-07 closing financial instruments position needs to be adjusted to form opening 2007-08 financial instruments position • This opening balance sheet adjustment arising from the prior period adjustment should be disclosed (as a total amount)but comparatives are not required to be restated. • Under FRS 26 recognition and de-recognition requirements of the SORP 2007 changes are effective from the 1st of April 2006 • Recognitions and de-recognitions of financial instruments occurring before 1st of April 2006 should not be reviewed, apart from overhanging premiums and overhanging discounts

  11. Disclosures of Financial Instruments – SORP 2007 GN - Page 722– Onwards – (2) • Significance of Financial Instruments for financial Position and Performance • Details of any financial assets that have been re-classified - if any 4.92 Page 723 • If an authority has reclassified a financial asset as one measured: (a) at cost or amortised cost, rather than at fair value (b) at fair value, rather than at cost or amortised cost • It should disclose the amount reclassified into and out of each category and the reason for that reclassification.

  12. Disclosures of Financial Instruments – SORP 2007 GN - Page 722– Onwards – (2) • Re-Classification of Assets – The SORP gives only limited discretion to do this 1. An asset with fixed or determinable payments either ceases to be or starts to be quoted in an active market • It becomes or ceases to be possible to establish a reliable fair value for an equity investment • It appears that no other re-classifications are possible under the SORP although some may be desirable • Please examine module 6 paragraph E9 to back this up

  13. Disclosures of Financial Instruments – SORP 2007 GN - Page 722– Onwards – (2) • Significance of Financial Instruments for financial Position and Performance – De-Recognition • If an authority has transferred financial assets in such a way that part or all of the financial assets do not qualify for de-recognition it should disclose for each class of such financial assets: (a) The nature of the assets (b) The nature of the risks and rewards of ownership to which the authority remains exposed (c) When the authority continues to recognise all of the assets, the carrying amounts of the assets and of the associated liabilities, and (d) When the authority continues to recognise the assets to the extent of its continuing involvement, the total carrying amount of the original assets, the amount of the assets that the authority continues to recognise, and the carrying amount of the associated liabilities.

  14. Disclosures of Financial Instruments – SORP 2007 GN - Page 722– Onwards – (2) • Transfer of assets to third parties not fully de-recognised • An example from the private sector would be where an instrument is sold to a buyer who has the unconditional right to return the asset at the original price (usually with interest). • These arrangements need to be examined in detail to determine whether the financial asset should be retained on the Balance Sheet and whether any monies received are sale proceeds or secured borrowings. • It is not expected that local authorities will have entered into transfer arrangements like this and the SORP does not set out any accounting provisions in relation to them. • In the exceptional event that authorities have entered into such transactions, they will need to make reference to the detailed provisions of paragraphs 15 to 37 and AG36 to AG52 of FRS 26.

  15. Disclosures of Financial Instruments – SORP 2007 GN - Page 722– Onwards – (2) • Significance of Financial Instruments for financial Position and Performance • The authority should disclose the amounts of collateral it has pledged to third parties and the collateral it has received Para 4.94 to 4.95 Page 724 – An Authority should disclose: (a) the carrying amount of financial assets it has pledged as collateral for liabilities or contingent liabilities, and (b) the terms and conditions relating to its pledges.

  16. Disclosures of Financial Instruments – SORP 2007 GN - Page 722– Onwards – (2) • Significance of Financial Instruments for financial Position and Performance • Where an Authority holds collateral and is permitted to sell or re-pledge it it should disclose: (a) The fair value of the collateral held (b) The fair value of any such collateral sold or repledged, and whether the authority has an obligation to return it (c) The terms and conditions associated with its use of the collateral.

  17. Disclosures of Financial Instruments – SORP 2007 GN - Page 722– Onwards – (2) • Significance of Financial Instruments for financial Position and Performance • Collateral – A Definition – “ An asset which a borrower pledges or deposits with a lender as a condition of a loan which can be sold off if the loan is not repaid • Asset could be – a physical asset (property and machinery), a legal charge on the borrowers assets, or stocks/shares belonging to the borrower • Authorities do not normally pledge collateral – but may receive collateral if they lend to third parties – These should be classified as exceptional TM transactions • Potential discussion points around collateral definitions

  18. Disclosures of Financial Instruments – SORP 2007 GN - Page 722– Onwards – (2) • Significance of Financial Instruments for financial Position and Performance • Definitions of collateral for Local Authorities – permission to sell or pledge a legal charge or a physical asset? • If LA’s are not permitted to offer their assets as collateral does the need for this disclosure note apply? • If Council policy decision is taken not to seek or offer any collateral does this mean that no note is necessary?

  19. Disclosures of Financial Instruments – SORP 2007 GN - Page 722– Onwards – (3) • Significance of Financial Instruments for financial Position and Performance • Allowance for credit losses - When financial assets are impaired by credit losses and the authority records the impairment in a separate account (eg an allowance account used to record individual impairments or a similar account used to record a collective impairment of assets) rather than directly reducing the carrying amount of the asset, • It should disclose a reconciliation of changes in that account during the period for each class of financial assets. Para 4.96 Page 724 • Use of an allowance account permits an authority to continue to record an asset at amortised cost, with an offsetting balance shown separately in the Balance Sheet

  20. Disclosures of Financial Instruments – SORP 2007 GN - Page 722– Onwards – (3) • Significance of Financial Instruments for financial Position and Performance • Defaults and breaches of loan liabilities payable to third parties – Para 4.97 Page 724 For loans payable recognised at the reporting date, an authority should disclose: (a) details of any defaults during the period of principal, interest, sinking fund, or redemption terms of those loans payable (b) the carrying amount of the loans payable in default at the reporting date, and (c) whether the default was remedied, or the terms of the loans payable were renegotiated, before the financial statements were authorised for issue. • It will be exceptional if an authority defaulted on a loan and should be very easy to identify from TM records and managers should have been made aware of this earlier

  21. Disclosures of Financial Instruments – SORP 2007 GN - Page 722– Onwards – (4) • Income and Expenditure Account and Statement of Total Recognised Gains and Losses Disclosures • An authority should disclose the following items of income, expense, gains or losses (1) – Net gains\Losses for the financial year on: -- Financial Assets\Liabilities at Fair Value through the I + E ( Not very likely) -- Available for Sale Financial Assets showing separately the amount of gain or loss in the STRGL and any amounts removed from the STRGL and taken to I + E -- Loan and receivables -- Financial Liabilities at amortised cost Loans and receivables\Financial liabilities – Gains and losses accounted for through I + E

  22. Disclosures of Financial Instruments – SORP 2007 GN - Page 722– Onwards – (4) • Income and Expenditure Account and Statement of Total Recognised Gains and Losses Disclosures • Further Descriptions: (b) Total interest income and total interest expense (calculated using the effective interest method) for financial assets or financial liabilities that are not at fair value through profit or loss. (c) The amount of any impairment loss for each class of financial asset will need to be shown

  23. Disclosures of Financial Instruments – SORP 2007 GN Para E11 - Page 733– Onwards (2)– Clarity on 2006-07 comparators?

  24. Irish Industries Funds Association Disclosures 2007

  25. Irish Industries Funds Association Disclosures 2007

  26. Disclosures of Financial Instruments – SORP 2007 GN - Page 722– Onwards – (4) • Para 4.99 Page 725 accounting policies – Embedded within its existing accounting policies an Authority should disclose: (a) For financial assets and financial liabilities carried at fair value, an authority should indicate whether carrying amounts are determined from quoted market prices, independent appraisals, discounted cash flow analysis or another appropriate method, and discloses any significant assumptions made in applying those methods. (b) The basis for reporting in the Income and Expenditure Account statement realised and unrealised gains and losses, interest and other items of income and expenses associated with financial assets and financial liabilities • Specific Disclosures will relate to Fair Value

  27. Disclosures of Financial Instruments – SORP 2007 GN - Page 722– Onwards – (4) • For each class of financial assets and financial liabilities an authority should disclose the fair value of that class of assets and liabilities in a way that permits it to be compared with its carrying amount. • An authority should disclose: (a) The methods and, when a valuation technique is used, the assumptions applied in determining fair values of each class of financial assets or financial liabilities. For example, if applicable, an authority discloses information about the assumptions relating to prepayment rates, rates of estimated credit losses, and interest rates or discount rates. (b) Whether fair values are determined, in whole or in part, directly by reference to published price quotations in an active market or are estimated using a valuation technique. Such comparisons between fair value and carrying amount are not always relevant

  28. Disclosures of Financial Instruments – SORP 2007 GN - Page 722– Onwards – (4) • For most authorities Fair Value Assessments will cover the following classes of financial instruments: 1.Financial Liabilities at amortised cost 2.Loans and Receivables • The following illustration is a typical note that an authority might include to meet the fair value requirements.

  29. Disclosures of Financial Instruments – SORP 2007 GN Para E17 - Page 735– Onwards (3)–

  30. Disclosures of Financial Instruments – Accounting Policies • Accounting Policies – A General Definition • “ The detailed methods of recognition, valuation and measurement that a company has chosen from proper practices to apply consistently to its financial reports.” • Example policies for LA’s to apply to the Financial instruments agenda are given in module 3 Paragraph C6 of the SORP 2007 GN • These policies are described on the next slide in summary form • Detailed slides for review by delegates will be included at the end of this presentation

  31. SORP 2007 Guidance notes – Modules 1 to 3 – the Main changes • Module 3 – Para C6 –Accounting Policies • Policy 2 Accruals of income and expenditure • Policy 14 Financial Liabilities • Policy 15 Financial Assets • Para D 11 Income and Expenditure Account Interest charges • Para D20 – Page 97 – Income and Expenditure Account – “Surplus or deficit of trading activities or other operations, including dividends from companies.” • Para D21 to D22 – Page 97 – Income and Expenditure Account – “Interest payable and similar charges.” • Para D25-26 – Page 98 – Income and Expenditure Account – “Interest and Investment Income.” • SMGFB Para E17 – Page 109 • STRGL – Para F8 page 114 • Balance Sheet – Para. L5 Page 141, Para. L14 Page 146, Para. L30-31 Page 148

  32. Nature and Extent of Risks arising from Financial Instruments and how the authority manages those risks An authority should disclose information that enables users of its financial statements to evaluate the nature and extent of risks arising from financial instruments to which the authority is exposed at the reporting date and how they have been managed. These risks typically include, but are not limited to, credit risk, liquidity risk and market risk.

  33. Disclosures of Financial Instruments – SORP 2007 GN - Page 722– Onwards – (6) • Nature and Extent of Risks arising from Financial Instruments and how the authority manages those risks Para 4.103 Page 726 onwards • Para 4.104 Qualitative risk -- For each type of risk arising from financial instruments, an authority should disclose: (a) its exposures to risk and how they arise (b) its objectives, policies and processes for managing the risk and the methods used to measure the risk, and (c) any changes in (a) or (b) from the previous period. • Para 4.105 Quantitative risk -- For each type of risk arising from financial instruments, an authority should disclose: • (a) Summary quantitative data about its exposure to that risk at the reporting date. This disclosure should be based on the information provided internally to key management personnel of the authority, for example the authority’s finance committee or chief executive officer. • (b) Concentrations of risk if not apparent from (a).

  34. Disclosures of Financial Instruments – SORP 2007 GN - Page 722– Onwards – (6) • Nature and Extent of Risks arising from Financial Instruments and how the authority manages those risks Para 4.103 Page 726 onwards • The main risks covered in the SORP 2007 GN are: credit risk – the possibility that one party to a financial instrument will fail to meet their contractual obligations, causing a loss for the other party liquidity risk – the possibility that a party will be unable to raise funds to meet its commitments associated with financial instruments market risk – the possibility that the value of an instrument will fluctuate because of changes in interest rates, market prices, foreign currency exchange rates, etc • It is not possible to set out a model disclosure note, as all authorities will have a unique profile to the risks to which they might be exposed and the measures that have been taken to minimise exposure in relation to the risk. • The range and benchmarking of risks has been examined in the previous presentation

  35. Disclosures of Financial Instruments – SORP 2007 GN - Page 722– Onwards – (6) • Nature and Extent of Risks arising from Financial Instruments and how the authority manages those risks Para 4.103 Page 726 onwards • Para 4.106 - An authority should disclose the credit risk by class of financial instrument: (a) the amount that best represents its maximum exposure to credit risk at the reporting date without taking account of any collateral held or other credit enhancements • (b) in respect of the amount disclosed in (a), a description of collateral held as security and other credit enhancements with an estimate of their fair value if possible • (c) information about the credit quality of financial assets that are neither past due nor impaired, and (d) the carrying amount of financial assets that would otherwise be past due or impaired whose terms have been renegotiated.

  36. Disclosures of Financial Instruments – SORP 2007 GN - Page 722– Onwards – (7) • Nature and Extent of Risks arising from Financial Instruments and how the authority manages those risks Para 4.103 Page 726 onwards • Further credit risk considerations • Para 4.107 - An Authority should disclose those financial assets which are past due but have not been impaired yet, those impaired at the reporting date and why and a fair value of any collateral held by the authority as security for those assets • Para 4.108 - When an authority obtains financial or non-financial assets during the period by taking possession of collateral it holds as security or calling on other credit enhancements (eg guarantees) it should disclose the nature and carrying amount of the assets obtained.

  37. Disclosures of Financial Instruments – SORP 2007 GN Para E24 - Page 739– Onwards (4)– Credit Risk Exposure

  38. Marks and Spencer Group Accounts 2007 Credit Risk Exposure

  39. Disclosures of Financial Instruments – SORP 2007 GN Para E24 - Page 739– Onwards (4)– Credit Risk Exposure – Past Due Date

  40. Disclosures of Financial Instruments – SORP 2007 GN - Page 722– Onwards – (8) • Nature and Extent of Risks arising from Financial Instruments and how the authority manages those risks Para 4.103 Page 726 onwards • Para 4.109 – Liquidity risk - An authority should disclose: (a) a maturity analysis for financial liabilities that shows the remaining contractual maturities, and (b) a description of how it manages the liquidity risk inherent in (a). Market Risk Para 4.110 - An authority should disclose: (a) a sensitivity analysis for each type of market risk to which the authority is exposed at the reporting date, showing how the Income and Expenditure Account and STRGL would have been affected by changes in the relevant risk variable that were reasonably possible at that date (b) the methods and assumptions used in preparing the sensitivity analysis, and (c) changes from the previous period in the methods and assumptions used, and the reasons for such changes.

  41. Disclosures of Financial Instruments – SORP 2007 GN Para E24 - Page 740– Onwards (5)– Liquidity Risk Exposure

  42. Marks and Spencer Group Accounts -- 2007 Liquidity Risk Exposure

  43. Marks and Spencer Group Accounts -- 2007 Liquidity Risk Exposure

  44. Disclosures of Financial Instruments – SORP 2007 GN Para E24 - Page 741– Onwards (6)– Market Risk 1 -- Interest Rate Risk Exposure

  45. Marks and Spencer Group Accounts 2007– Market Risk 1 -- Interest Rate Risk Exposure

  46. Disclosures of Financial Instruments – SORP 2007 GN Para E24 - Page 741– Onwards (6)– Market Risk 2 – Price risk Exposure

  47. Disclosures of Financial Instruments – SORP 2007 GN Para E24 - Page 741– Onwards (6)– Market Risk 3 – Foreign Exchange Rate Exposure

  48. FRS 25 – Financial Instruments Presentation – Practical Implications • All Authorities are within the scope of the FRS 25 “presentation” requirements (under SORP 2006) • A financial asset and a financial liability should be offset and the net amount presented in the balance sheet when, and only when, an authority: (a) currently has a legally enforceable right to set off the recognised amounts; and (b) intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. • Financial liabilities – usually treated as settled within 12 months unless the authority expects and has the discretion to roll over or re-finance an obligation for at least 12 months • Para 4.111 onwards SORP 2007 is relevant here

  49. Financial Instruments – Accounting Policies – Marks and Spencer Group Accounts 2007 (1) • Financial assets and liabilities are recognised on the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument. • Trade receivables are recorded at their nominal amount less an allowance for any doubtful debts. • Investments and other financial assets are classified as either ‘available for sale’, ‘fair value through profit or loss’ or ‘held to maturity’ • Where securities are designated as ‘fair value through profit or loss’, gains and losses arising from changes in fair value are included in net profit or loss for the period.

  50. Financial Instruments – Accounting Policies – Marks and Spencer Group Accounts 2007 (2)

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